Posttransplantation cyclophosphamide (PTCy) is an effective prophylaxis against graft-versus-host disease (GVHD). However, it is unknown whether PTCy works singularly by eliminating alloreactive T cells via DNA alkylation or also by restoring the conventional (Tcon)/regulatory (Treg) T-cell balance. We studied the role of Tregs in PTCy-mediated GVHD prophylaxis in murine models of allogeneic blood or marrow transplantation (alloBMT). In 2 distinct MHC-matched alloBMT models, infusing Treg-depleted allografts abrogated the GVHD-prophylactic activity of PTCy. Using allografts in which Foxp3+Tregs could be selectively depleted in vivo, either pre- or post-PTCy ablation of donor thymus-derived Tregs (tTregs) abolished PTCy protection against GVHD. PTCy treatment was associated with relative preservation of donor Tregs. Experiments using combinations of Foxp3-Tcons and Foxp3+Tregs sorted from different Foxp3 reporter mice indicated that donor Treg persistence after PTCy treatment was predominantly caused by survival of functional tTregs that retained Treg-specific demethylation and also induction of peripherally derived Tregs. Finally, adoptive transfer of tTregs retrieved from PTCy-treated chimeras rescued PTCy-treated, Treg-depleted recipients from lethal GVHD. Our findings indicate that PTCy-mediated protection against GVHD is not singularly dependent on depletion of donor alloreactive T cells but also requires rapidly recovering donor Tregs to initiate and maintain alloimmune regulation.